Bankruptcy has been in the news a lot lately, ranging from your neighbor and his foreclosed home to the very largest US auto manufacturers. But bankruptcy is not a one-size fits all proposition. Here’s a look at the most common types of bankruptcy:
Chapter 7 Bankruptcy: Chapter of the Bankruptcy Code that provides for court administered liquidation of the assets of a financially troubled individual or business. This is the most familiar type of bankruptcy, in which many or all of your debts are wiped out completely in exchange for giving up your nonexempt property. Chapter 7 bankruptcy takes from three to six months, costs about $200, and commonly requires only one trip to the courthouse.
Chapter 11 Bankruptcy: Chapter of the Bankruptcy Code that is usually used for the reorganization of a financially troubled business or consumers with an extraordinary amount of debt. Used as an alternative to liquidation under Chapter 7. The U.S. Supreme Court has held that an individual may also use Chapter 11.
Chapter 12 Bankruptcy: Chapter of the Bankruptcy Code adopted to address the financial crisis of the nation’s farming community. Cases under this chapter are administered like Chapter 11 cases, but with special protections to meet the special conditions of family farm operations.
Chapter 13 Bankruptcy: The reorganization bankruptcy for consumers, in which you partially or fully repay your debts. Plan payments usually come from the debtor’s future income and are paid to creditors through the court system and the bankruptcy trustee. In Chapter 13 bankruptcy, you keep your property and use your income to pay all or a portion of the debts over three to five years. The minimum amount you must pay is roughly equal to the value of your nonexempt property. In addition, you must pledge your disposable net income — after subtracting reasonable expenses — for the period during which you are making payments. At the end of the three-to five-year period, the balance of what you owe on most debts is erased.
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That’s some interesting definitions on bankruptcy. The thing that is ok with banks is that as long as you keep your money invested under the FDIC maximum of $250K/institution, you should be fine even if the bank goes under.